Reverse Mortgage Market Opens ABS Doors

Following Financial Freedom Senior Lending Corp.'s $317 million, first-of-its-kind reverse mortgage securitization in August, the asset-backed securities marketplace can expect similar deals to hit the water soon, according to a source familiar with the transactions.

"A lot issuers who previously thought [reverse mortgages] were difficult to securitize are now talking about doing it," the source said.

The largest originator of reverse mortgages, Unity Mortgage Corp., may be diving in shortly. The Atlanta-based company is currently in talks with Lehman Brothers, according to a source, and is prepping a debut fourth-quarter deal. "We should be rolling one off pretty soon," the source said, adding that the deal looks to be in the $150 million to $200 million range. "There seems to be a desire for it on Wall Street."

A reverse mortgage, typically available to senior citizens only, occurs when money is paid to a homeowner by a bank, whereupon the collateral is the cash flow the home raises the next time it hits the real estate market. The maturity of a reverse mortgage is then determined by an event such as a move by the homeowner or, more frequently, by the death of the homeowner.

"We do believe that the reverse mortgage market has significant potential given the very favorable demographics in the United States," said Craig Corn, senior vice president at Lehman, which managed the Financial Freedom deal.

A source close to the reverse mortgage market predicts that in the future, reverse mortgage deals are likely to grow in volume. "Any deals going forward would have to have a minimum size, and that's $100 million, given the costs involved."

Lenders have traditionally been selling off loans individually to Fannie Mae, which currently holds the largest portfolio of reverse mortgages. As to whether Fannie Mae plans to securitize these loans, an official for the company said they plan to continue holding the loans in their portfolio.

However, in light of the success Financial Freedom's securitization, lenders such as Unity are now more likely to pool loans for securitization as opposed to selling them off on a individual basis.

"[Securitizing] would allow some derivatives in expanding the product menu," said the source, adding that with current conditions, reverse mortgage providers are somewhat limited as to whom they finance. "[Securitizations] would just open up our loans to younger buyers, things that Fannie Mae would not buy, but are appealing to us."

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